Is China’s Property Bubble About to Burst?

I’m a four-time homebuyer in Shanghai, and I’ve always regretted the first three apartments I sold.

The first one was a few blocks away from Hongqiao Airport. My wife and I bought it when we settled in Shanghai 17 years ago. It was a two-bedroom apartment and cost a little over 30,000 yuan — then the equivalent of about $3,600. It came about as an incentive program for government workers to own private homes.

Two decades ago, private housing was unfamiliar to most Chinese. The market correction from 1995 to 1999 allowed us in when prices were at their lowest. The slum-like look of the compound — as well as the risk that the thundering noise of planes taking off and landing might harm our baby son’s hearing — soon led us to look for a second apartment.

My parents, who still worked as farmers in the countryside, were scared when I called to say that I had just spent over 600,000 yuan on a brand-new three-bedroom apartment. It was a “new millennium” gift to my young family, and it allowed my parents to come and spend time with their grandson. The local government, under pressure from a stagnating property market, offered income tax rebates — and even Shanghai citizenship — to entice prospective buyers. I even had my income tax fully refunded during those golden years for property investors.

To fund the refurbishment of the second apartment, my wife and I sold the first one for about 130,000 yuan. I have always regretted that sale, as a few years later it was worth 10 times as much. We enjoyed the second apartment for a few years until my son was due to start school and it became necessary to move to a more reputable zoning area. This was how we acquired a third apartment downtown in 2007 for 1.45 million yuan. Soon after came a fourth, this one overlooking a park near the junior high school my son went to. Despite our reluctance, we had to sell the second and third apartments to pay for the fourth.

The school was great, and the park too. But the sad thing was that in just three years, the small, downtown apartment came to be worth more than the big one we live in now — not to mention the more than 1 million yuan we paid the government in tax on the sales transactions.

What unsettles me is not so much the bleak outlook for the property sector, but rather the blind faith among the public that China will somehow be able to avoid a collapse.

- Lu Hongyong, editor

One of the reasons I was able to convince my family to sell two apartments to buy just one had to do with concerns that China would implement a capital gains tax, or a tariff on profits from property sales. Starting in 2014, the cities of Shanghai and Chongqing, in southwestern Sichuan province, have been levying a property tax on households “above par” — which in Shanghai means those having more than 60 square meters of space per family member. Alongside that experiment, cities across the country are integrating homeowner information so that nobody can evade capital gains taxes on their property portfolio, whether in their home cities or elsewhere.

This time last year, China was utilizing any means necessary to whittle away at its mounting housing supply. The national property inventory — excess space not in use — grew to a record 656.8 million square meters in April 2015, or more than half of all property space sold in the previous year.

Since October, 22 cities have come together to rein in property prices, banning non-residents and third-time buyers from acquiring property and demanding 60-percent down payments from families in the market for a second home. Most local governments fund their budgets with the proceeds from land auctions, whereby land is leased to property developers. When developers began to cancel construction projects because of soaring inventory, the amount that auction sales contributed to local budgets quickly fell from nearly 60 percent in 2013 to just 32 percent in 2015, according to the Ministry of Finance.

Since then, authorities have stepped in with adjustments on interest rates and down payments, and have attracted vast numbers of rural workers to the cities through urbanization initiatives. At the same time, a dip in the stock market prompted many investors to snatch up property, quickly turning an oversupply into a shortage. Since the middle of this year, however, investors have had trouble buying property, since in many cities there remains only enough housing stock to last two months. As prices rise, the government is now desperate to keep buyers from entering the market.

The housing market in a way reflects the status of a city, but price spikes drive young talent away, drain funding to industry, and jeopardize the economy in the long run. It’s in the interest of all market players to keep growing the property market, but at a reasonable rate instead of letting it soar upward uncontrollably. With investors now sitting on the sidelines and with market growth back at a more modest level, it’s unlikely that the government will put greater curbs on home loans and buyer restrictions unless the bubble further inflates. China witnessed its first property bubble in 1993, when experimental housing distribution policies were enacted in the southern island province of Hainan. The country battled against further bubbles in 2008, 2011, and 2014, but each time was scuttled in its attempts to fully remold policy, both by the financial crisis abroad and by the flatlining economy at home.

China has shown that it is willing to resort to quantitative easing when economic development slows down. Yet with oversupply in most industries, real estate remains the last safe haven for both corporate and private investments. As a result, the property bubble looks big enough to burst, and the government is still busy blocking hungry buyers from becoming more indebted.

What unsettles me is not so much the bleak outlook for the property sector or the billions of yuan in savings going to waste, but rather the blind faith among the public that China will somehow be able to avoid a collapse on the scale of the 2008 U.S. subprime mortgage crisis or the 1991 Japanese market meltdown, both of which revealed the catastrophic effects of busting bubbles.

Bullish Chinese investors are convinced that the current trend is a policy-driven correction that will bring stability to the market, or that such policies have come and gone many times before without irreparably damaging prices. However, more cynical people like me are becoming resigned to the idea that everybody is in the same boat — and that when the bubble finally bursts, it will sink us all.

(Header image: An illuminated apartment is seen through the branches of a tree in a residential area in Baoding, Hebei province, April 1, 2014. Zhou Pinglang/Sixth Tone)